297. Harrod to Joan Robinson , 21 March 1933 [a]
[Replies to 296 , answered by 298 ]
51, Campden Hill Square, W.8. #
21 March 1933
I attach some importance to the total cost curve. In long period equilibrium the long period and short period total cost curves are tangential. The question is, do these, for equilibrium output, have the same value as the demand curve? If so, they are tangential to it also, and your proposition that the firms in imperfect competition must have decreasing costs is established. 
I hold that if the cost curve is constructed on the basis on the long period supply price of fixed equipment to the firm, the total cost per unit curve and the demand curve need not have the same value in long period equilibrium. You only succeed in making them have the same value by defining normal profit in a different way. But your way is, I hold, irrelevant.
The long period supply price of fixed equipment to the firm (my normal rate of profit  ) may be lower than the profit required to attract new firms; in that case the long period supply price of fixed equipment to the firm may be lower than its average rate of profit on fixed equipment. In that case the marginal rate of profit in fixed equipment in long period equilibrium may be lower than the average rate. Price (= prime cost + average rate of profit on fixed equipment) may be higher than prime cost + marginal rate of profit on fixed equipment (= prime cost + supply price on fixed equipment.) If price > prime cost + supply price of fixed equipment, gradient of demand curve has a greater negative value than total cost curve. All we know is that the demand curve must have some negative value. Consequently the cost curve may not have negative value at all; i.e. the firm may not be subject to decreasing costs.
2. Letter 295 , [jump to page] . Harrod's earlier definition of "normal profits", referring to the short period equilibrium in imperfect competition, was given in "The Law of Decreasing Costs" ( 1931:2 ), pp. 571-72. As to perfect competition, see Harrod, "Notes on Supply" ( 1930:3 ), pp. 234-35.
- a. ALS, two pages on one leaf, in JVR vii/191/5-6.
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